Performance in perspective

WHILE things appear dismal on the US stock exchange, it is perhaps timely to remind ourselves that Australian investors have reasons to remain optimistic.

A report by BankWest economists Alan Langford and Josh Rubin puts a different perspective on the current state of the Australian and US markets to that of the doomsayers.

Up until last week the All Ordinaries Index had lost a relatively modest 13 per cent of its all-time high. The Dow Jones has fallen 30 per cent.

This was due in part to the more modest growth preceding the fall.

BankWest points out that Australia’s bull-run totalled only 85 per cent, whereas the Dow rose by 200 per cent between early 1995 and its peak in early 2000.

But even the Dow has seen worse days. For example, the 1987 crash swiped 36 per cent off the index. And in 1973, during the height of the oil crisis, high unemployment and high inflation, US stocks dropped 45 per cent.

“None of the corrections’ crashes referred to so far have come anywhere near the great stock market crash of the late 1920s and ’30s,” BankWest’s Economic Update says.

“Back then, the Dow lost a total of a staggering 89 per cent of its value before it bottomed.

“Moreover, it took more than 25 years – until late 1954 – for the Dow to claw back above its pre-crash August 1929 peak.

“It must be stressed that the Dow’s long ice age straddled the Second World War and the debilitating deflation of the depression years, so in real terms it was not as bad as that.

“Nevertheless, nominal [before adjusting for inflation] growth in asset prices has an important bearing on consumers’ propensity to spend and businesses’ willingness to invest, both of which are crucial to the profile of growth in the US economy.”

Also contributing to domestic optimism is the knowledge that, whereas Australia performed worse than the US in 1987, this time it is the US market that is likely to suffer the strongest pull-back in prices.

In 1987 the All ordinaries fell by 50 per cent compared with the Dow’s 36 per cent. Australia’s bull-run in the lead up to the 1987 crash increased stocks by around 400 per cent, while the Dow then rose a more modest 240 per cent.

“Accordingly, just as it was not surprising that Australia’s stocks suffered greater damage than did US stocks in 1987, it is not unreasonable to expect the eventual trough in the local market to be shallower than the Dow’s,” the Update says.

Universal IPO over the line

PERTH-BASED Universal Resources Limited is the latest mineral explorer to get its initial public offering over the line in an increasingly tough capital raising climate.

Universal Resources closed its offer about two weeks later than the directors Kenneth Foots, James Walls, Campbell Ansell, Maurice Hoyle and managing director and executive chairman Peter Ingram anticipated.

Mr Ingram said the fact that the company, formed in 1999, managed to reach its $4 million minimum subscription was a testament to the strength of the projects and the team.

“Universal’s success is, we believe, a reflection of the quality of our projects and exploration team, as well as continued underlying investor support for the resources sector even in generally unstable and declining equity markets,” he said.

“It is also a tribute to the enormous effort put in by both our corporate adviser and underwriters in the past few weeks to close the issue.”

The issue of up to 25 million 20 cent shares representing equity in around one-third of the company, including a one-for-two free attaching option was underwritten to $3 million by falconer Bellomo & Co. Melbourne-based Dalkeith Resources head David Walker acted as corporate adviser.

Monies of around $410,000 have been distributed by the company in capital raising costs, including a $200,000 underwriting fee and a $100,000 corporate advisory fee, Universal has allocated a further $2.1 million in exploration over the next two years at its six Queensland and New South Wales projects.

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